How Does Social Security Factor Into Your Retirement Plan ...

?It?s funny, because when we run cash flow projections for our clients, a lot of them will say, ?Oh, you know, I don?t know. Social Security is so shaky. Let?s not include it.? So, we?ll run one [projection] without it and one with it. It?s a big difference. And when they see it, they say, ?Well, yes, OK, let?s keep that in.??

Financial planner Mark Balasa got a chuckle from the crowd when he made that statement at Morningstar.com?s retirement income seminar in January 2011, no doubt because at least some audience members saw a bit of themselves in it. Because it provides an inflation-adjusted income stream that will last through a retiree?s life, Social Security is an incredibly powerful benefit. At the same time, deficit worries have led some to question whether the program will continue on its current course: Proposals to reform Social Security have included raising the eligibility age, tweaking the inflation adjustment, or incorporating means-testing so that wealthy beneficiaries would receive a scaled-back benefit.

I recently asked Morningstar.com Discuss forum participants to share how Social Security had factored into their own retirement planning. Posting in the Investing During Retirement forum, I asked them if they were counting on a full benefit or were planning on scaled-back level of income from the program.

A robust conversation ensued, with clear divisions based on life stage. While retired or soon-to-retire posters generally had a moderate or high level of confidence they?d receive their full benefits, younger investors were more skeptical that the program would be viable by the time they got around to retiring. Some posters also shared what role Social Security had played in their retirement plans. It has been an essential component of some retirees? income streams, while others put their Social Security benefits in the category of ?nice to have.?

To read the complete thread or share the role of Social Security in your own retirement planning process, click here (http://socialize.morningstar.com/NewSocialize/forums/p/302759/3230813.aspx#3230813).

?I Think Social Security Benefits Are Fairly Sure?
A small contingent of posters who are retired or close to retiring have not factored Social Security benefits into their planning process. Chief K, while not expecting the imminent dissolution of Social Security, was a rare poster who?s currently eligible for Social Security but is leaving open the possibility that his benefits could be curtailed in retirement. He wrote, ?I expect Social Security benefit payments to continue in something close to the existing form. However, I have decided to discount the amount of estimated benefits for me (I?m over 65) by 15% because, I am just guessing about the future and I always prefer any financial surprises to be ?better? rather than for them to be ?worse.??

More commonly, however, retirees who posted are fully expecting to receive their full benefits during their lifetimes.

Bubbygator was among the first retirees to weigh in, speaking for many when he said he?s counting on his full benefit. He went on to argue that altering the system in a way that would affect current retirees? incomes wouldn?t be politically viable. ?I believe that if any changes are made to the Social Security system, such changes will not be retroactive to people who have already qualified and are currently receiving benefits. One reason I believe this is that the existing retiree base would raise hell politically against any retroactive bill.?

Racqueteer concurred that those who are already taking benefits are unlikely to see their benefits cut. Thus, he wrote, ?I took Social Security at 62, and I think by doing that, I made it more likely that my benefits will be grandfathered in regardless of what happens in the future.?

FidlStix agreed. ?For all the heat and light being generated over the demise of Social Security and Medicare, I think Social Security benefits are fairly sure for those of us 55 or older. I expect my wife and I will derive about 40% of our retirement expenses from our Social Security benefits.? He went on to note that major market shocks are a bigger concern. ?Although I?m looking to investment income for a big portion our retirement, I feel very vulnerable to Black Swan attacks.? ["Black Swan" refers to Nicholas Taleb's book of the same name, which argued that market participants tend to underestimate the probability of extreme market events.] ?However, federal programs like Social Security are relatively protected against Black Swans, if not attacks from Washington insiders seeking political advantage.?

?Without It I Would Have to Pinch Pennies?
Retired posters also shared what role their Social Security benefits had played in their in-retirement plans. For Bobert42, and many others in the thread, it?s been a big one. ?My wife and I both collect Social Security. In 2011, Social Security contributed 44% of our income. In 2012 this will jump to 64%. So yes, Social Security is and will continue to be a big factor in our retirement. We would be in deep trouble if we had to depend on income from our investments given the poor performance over the past decade or so.?

WOODJ is on the same page, writing that his household?s Social Security benefits amounted to 55% of their spending last year. He concluded, ?I need Social Security to maintain our standard of living.?

JBP57?s post illustrates what a lifesaver Social Security can be for those who have had to stop working earlier than they had hoped. ?Social Security is the largest part of my yearly income. I started drawing at 65 and 10 months because I was out of work and had gotten used to eating on a regular basis. I continued to draw when I went back to work. The only jobs out there were $10-per-hour counter-help jobs (one third of what I made in construction) so it is appearing in this new normal, retirement may not be an option. We will have to cobble together a number income streams, employment, Social Security, pension, and investments in order to make it. My counter-help job lasted 16 months, and here I am pushing 70 and looking for work again. The upside is, my wife is 10 years younger, self-employed, solvent, plans to work to age 70, and we have little debt, only our mortgage. I?ll just have to put off my ?Golden Years? until I?m 80. So, I?m just quite thankful for Social Security.?

AviOren noted that he and his spouse use Social Security to take care of medical expenses, which tend to increase during retirement. ?In my wife?s and my case, Social Security helps pay for Part B and medical expenses above Medicare.?

Other posters noted that Social Security has reduced the demands they?ve had to place on their portfolios.

ColonelDan wrote, ?I took Social Security at 62 to supplement my military retirement so I wouldn?t have to touch my IRAs until required minimum distribution time. The plan is working out very well.?

For others, Social Security covers the extras that contribute to their quality of life.

Racqueteer wrote, ?I don?t depend on my Social Security, but it makes it a lot easier to live comfortably in retirement. It?s about one third of my income, so without it, I would have to pinch pennies.?

Merjet quipped, ?If my monthly benefit is ever reduced, it might put some pressure on our vacation and entertainment budget.?

Stockvapors isn?t planning to take Social Security until age 70, but likes that the benefits can help hedge against a lot of different possibilities. ?It will be my extra inflation hedge, my extra cash for medical bills or if I am lucky and healthy, my extra cash for charities and vacations. It is also my security blanket in case we have a major depression or some other economic meltdown that eliminates a good chunk of my investments.?

Ditto for gary11112, who wrote, ?For us Social Security is the difference between dying and leaving something behind and/or long-term care that we pay for versus dying broke and/or long-term care the state pays for. It?s also the difference between sleeping soundly at night through market gyrations or worrying about every market-affecting event.?

?A Huge Codgers March on Washington?
Among readers closing in on retirement but not yet tapping Social Security, most say they are counting on their benefits to supplement other sources of retirement income, in large part because of the firestorm that could ensue if benefits are altered. Juris2, who will use Social Security to supplement 403(b) withdrawals in retirement, notes, ?We could probably hunker down and survive if there were no Social Security at all. But the likelihood of Social Security disappearing is nil for people in my age cohort. They could fiddle with the inflation adjustment, but I don?t think that would have a materially harmful effect on my income. (If it did, the government could expect a huge Codgers March on Washington. When people have nothing to lose by protesting, they will band together and do it.)?

Nelsoe hasn?t yet begun taking Social Security, but isn?t anticipating great changes to the structure of the program, either. ?I anticipate that the Social Security benefits will continue to be adjusted for inflation and not otherwise means-tested.?

GAPAhl is also counting on Social Security benefits to augment investment income. ?My wife and I will be retiring in four years at our full retirement age of 66. One of us may elect to hold off receiving Social Security benefits until 68 or later, to spike the payout a bit. We have retirement savings that should contribute 55%-60% of our retirement income, but we expect Social Security to be a significant part of our fiscal ?pie? for the rest of our lives.?

BlackCoffee, approaching retirement, says employing Social Security as part of his in-retirement budget has allowed for a more stock-heavy portfolio. ?As Social Security and rental income will roughly cover our nondiscretionary expenses, the Social Security entitlement has allowed me to be a little more aggressive in my portfolio asset allocation than I would otherwise. While allocation is a personal choice, because of Social Security I am comfortable with a 10-25-65 mix (cash, bonds, stock) whereas without it I would probably want to be closer to 10-50-40 without it. So the Social Security entitlement is letting me take on a little more risk and still sleep.?

He went on, ?I view Social Security as an indexed annuity stream for the both of us with a 50% spouse benefit (when one of us dies the other is left with their own Social Security entitlement?more than half the combined total in my case and less than half in my wife?s case). The payment stream with spouse benefit and indexing would cost about $1.5 million to purchase. ?

Jocojayhawk has, similarly, considered Social Security as an annuity for retirement-planning purposes; in his case, the goal of that income stream is to save it for the kids. ?We have fashioned our budget around the premise that Social Security represents a large, inflation-adjusted annuity that is not an ?entitlement? but a multidecade, paid-in retirement benefit. As I see it, our large, nearly untapped nest egg will be be passed on to our son and his family to ensure that there will be an income stream for them in retirement 30-plus years from now when potentially the government?s ability to fully provide this earned annuity won?t be there for them. ?

Wartybliggins shared the following formula for quantifying the value of Social Security benefits. ?I considered the calculated present value of Social Security as owning a bond fund delivering a 4% return. I calculated the virtual present value of my Social Security benefits as about $400,000 of shares in a fund with a payout of 4%. In other words, the Social Security benefit substitutes for a $400,000 holding. For most of us, that virtual present value plays an important role in our retirement wealth accumulation strategies and if you can get by for a few years without drawing it, the virtual present value increases. So to determine the real effect Social Security will have in capitalizing your retirement, multiply your expected Social Security monthly benefit by 12 and divide by 0.04. The result is the virtual capital contribution your Social Security adds to the principal value of your retirement.?

Posters strategizing about their impending retirements differed on whether to take Social Security benefits early, thereby delaying tapping their investments, or waiting, and in so doing enlarging their benefit amounts. JHAsheville is in the former camp: ?My partner and I plan on collecting Social Security at age 62 after paying in to the system for over 40 years. By hitting up Social Security at age 62 we figure we can keep our ?buckets? safe and working harder and longer for us by staying put in our portfolio.?

DSRoss was also an early filer. Similar to JHAsheville?s idea, doing so reduced portfolio withdrawals at an inopportune time. ?I retired in 2004 and began taking Social Security in 2008 at age 62. Given what transpired in 2008, taking Social Security at the time was the right move. It cushioned the withdrawals I would have had to make which would have had an impact on the ability of my portfolio to recover since then.?

Almstthr, on the other hand, has decided to wait. ?I turned 65 in February. I have done the calculations comparing collecting now versus allowing the payment to increase by waiting. It does appear that it will take me 12 years to ?balance? the waiting period, but I enjoy what I do, get paid reasonably well to do my job, which includes a lot of travel.?

TerryQ50 has also decided to wait. ?Based on articles and interviews with Mary Beth Franklin, I now view Social Security as an inflation adjusted annuity with a 32% enhancement in benefits if we postpone applying for those benefits from age 66 to 70.?

Other posters who are nearing retirement are leaving open the door to the possibility that Social Security could be tweaked during their retirement years. VinceN wrote, ?We are definitely counting on Social Security being available. We also realize that Social Security benefits could be reduced in the future for us.?

TOOOINTENSE is even more pessimistic. ?I do not factor Social Security into any retirement funding. I am not yet in retirement (thanks to my wife not wanting me to putter around the house), and I think it would be unwise to count on any government assistance because of its track record in financial mismanagement. Would you let a drunk hold the key to your wine cellar??

?The Uncertainty Is Simply Too High?
While most posters aren?t expecting imminent cuts in Social Security benefits, many in the thread believe that benefits will likely be reduced for people who will retire many years from now.

Doug89 said plainly, ?I?m 22, and I don?t expect Social Security to exist when I retire.?

Similarly pessimistic was AndThat, who wrote, ?My wife and I both just turned 30, we?ve both been paying in to Social Security for close to 15 years, and neither of us honestly expect to rely on it whatsoever for retirement. The benefits might still be there in some form 35 years from now, and it would be nice if there were something for us. But much more solvent things have gone belly up in much less time.?

Approximately 30 years from retirement, random1 isn?t factoring Social Security into retirement planning, either. ?I am not counting on getting a dime from Social Security, and I believe that many of my peers are planning similarly.?

That sentiment was echoed by Carrie, who wrote, ?I?m 45 and don?t factor Social Security into my retirement planning at all. For someone my age, the uncertainty is simply too high.?

Retirement is 13-15 years away for Dabignip, but he?s not counting on benefits either. ?I am investing now as if neither my wife nor I will receive any Social Security benefits at all. By necessity, this means a focused balance on both diversified global growth and capital preservation.?

Other posters who are many years from retirement don?t expect Social Security to go away but do expect that benefits will be changed or reduced. Skreet wrote, ?I?m 38 years old. I anticipate Social Security to be there when I get ready to retire, but I expect that the payout will be about 50% of what is currently provided. That still is pretty helpful but certainly not enough to live off without additional retirement funds. Should Social Security benefits be available to us in our retirement, then it is all lagniappe that will boost our quality of living.?

Llaroo is also expecting changes to the benefits calculations. ?I?m 53, and I expect that at some point before I am scheduled to draw on my Social Security (I will not do so until at least age 67) there will be means-testing or some other reduction in the current value of benefits. I have never included Social Security in my retirement planning, so it will be a bonus if I get any Social Security at all. If the rest of the pieces of my retirement plan keep falling into place, I intend to give my Social Security benefits to my children or grandchildren because the way our economy is heading long term, they are going to need it.?

MWarny would also view Social Security benefits as gravy. ?I am convinced I will get ?something,? but my retirement plan does not count on them to be conservative.?

ArgonBeam, 38, has gone so far as to set aside a separate fund to make up for an anticipated Social Security shortfall. ?I am assuming that I will not have any Social Security to draw upon. I would guess that means-testing or some other income limit will be put in place, and I won?t be eligible when my time comes. My current retirement forecasts estimate how much Social Security I should receive monthly. I then estimate how much I have to save now to provide that monthly amount at age 67 (my planned retirement age, as I believe retirement age will rise in the upcoming decades) assuming a modest 5% annualized return on what I am saving now. I set aside that calculated amount into a pre-existing aftertax account (I max the nontaxable). Definitely a glass half-empty approach, but I don?t want to count on money that I don?t have.?

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Article source: http://finance.yahoo.com/news/does-social-security-factor-retirement-110000230.html

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